Where Did the GDP Growth Go? Not into Wages

Where Did the GDP Growth Go? Not into Wages

How can the economy grow by roughly one-third in real dollars while real median household income drops like a rock?

Based on gross domestic product (GDP), the U.S. economy has grown smartly since 2000: GDP rose from 10,031 in 2000 to 17,840 in mid-2015. That’s an increase of 77.8%.

If we adjust GDP growth for inflation, we get what’s known as real GDP, which increased 31.6%: from 12,360 in 2000 to 16,270 in mid-2015. This works out to a real annual GDP growth of about 1.9% annually.

It would be natural to expect full-time employees’ wages and salaries to rise at about this same rate as the economy expanded. But real median weekly earnings (wages and salaries) increased a grand total of $7 in the past 15 years: from $334 per week to $341 per week.

If wages and salaries had risen at the same 1.9% annual rate of real GDP growth, median weekly earnings would be $443, not $341. That’s $102 more per week. But weekly median earnings for full-time workers rose only $7 per week, not $102 per week.

In other words, the real GDP growth hasn’t trickled down to wages and salaries.

Real household income–which includes both earned income and unearned income such as dividends and interest–has plummeted 8.5% since 2000. This is a striking contrast with real GDP growth of 31.6%: the economy has expanded 31.6% after adjusting for inflation, while real median household income has declined 8.5%.

If real median household income had grown at the same 1.9% annual rate of GDP growth, it would now be $75,000 a year, rather than $52,000.

So where did all this GDP growth end up? How can the economy grow by roughly one-third in real dollars while real median household income drops like a rock and real wages/salaries are essentially unchanged for 15 years?

You can check these projections based on 1.9% annual growth for yourself with a simple Excel spreadsheet.